Life was famously compared to a box of chocolates 21 years ago on the grounds that one “never knows what they’re gonna get.” Which, as it turns out, is almost a perfectly good metaphor for the payments and commerce ecosystem, though perhaps with a minor caveat.
You may not know what you’re gonna get, but you can always know what you’re not gonna get. And that is whatever it is you’re expecting to get.
Predictions in payments can be nearer or further from the mark, but actually hitting a bullseye dead-on is rare — a wise caveat to consider as 2015 starts to wind down and prediction season starts to spin up.
And easily observable this week as Visa got pretty close to meeting the market’s expectations, the job market exceeded them and Square got very busy managing them on their road to IPO. Ready for more?
While an acquisition of Visa Europe by Visa Inc. has seemed imminent for some time, the deal seemed somewhat imperiled by the end of October 2015, or at least at risk of going through for far less than the $21 billion analysts had spent the last several months calling for. The concerns came in the aftermath of a Seeking Alpha article that indicated the deal was stalled — or that analysts’ estimates on pricing were way off.
As of last Monday, however, a definitive agreement for Visa Inc. to acquire Visa Europe for the creation of a single, global company was announced jointly by both firms. The deal’s total top value will be €21.2 billion, or $23.4 billion — outstripping the average analyst estimate of $21 billion. That will mean $18.2 billion for Visa Europe in upfront considerations and $5.2 billion payable following the fourth anniversary of closing.
So what does $23 billion buy Visa?
Visa clearly wants to gain a stronger foothold in Europe, and with Visa Europe’s volume growth, it is a very attractive partner. According to company figures, volume in the latest quarter was $1.3 trillion, up 11 percent year on year. Cross-border volume, which hints, possibly, at synergies across the two companies, was up 5 percent for Visa.
By bringing Visa Europe in-house, so to speak, Visa also gets to further consolidate its expansion on the global stage in recent years.
Plus, the European market is oddly competitive for a collection of developed economies, as roughly 37 percent of personal consumption is still done through cash and checks — and at $3.3 trillion, that’s a lot of potential business, even incrementally.
According to annual report data, there were 509 million active Visa accounts in Europe, with more than 16 billion clearing and settlement transactions processed. The POS statistic of more than €1.4 trillion represents 8 percent growth from the previous full year.
The Visa Europe news was more or less the starring player in Visa’s Q4 call with analysts, but it was not the only significant piece of news up for grabs to lead off the week.
Overall, Visa’s net income for the quarter hit $1.5 billion, a 12 percent increase from the year prior. Payments volume growth hit $1.3 trillion, an 11 percent increase on the year. Cross-border volume growth grew 5 percent in the quarter.
Total processed transactions for Q4 hit 18.4 billion, which was an 8 percent increase YOY. Total processed transactions for the 12-month period ending Sept. 30 hit 71 billion, which is a 9 percent increase from the year prior. All in, Visa delivered on revenue but missed on earnings expectations, which The Street didn’t love, sending Visa’s stock down a notable 3 percent in after hours trading.
“Visa’s fiscal fourth quarter was a strong finish to an equally strong fiscal full-year 2015 in terms of revenue and earnings per share growth in the face of a continued challenging global economic environment. The underlying growth of our franchise continued as evidenced by our strong payments volumes as well as new and renewed partnerships during the year. Most importantly, we continued to build our capabilities at the physical point of sale as well as in the digital space,” CEO Charlie Scharf said of Visa’s performance.
Visa’s stock price rallied throughout, thus recouping their losses before adding ~2 percent gains to their stock price by the close of business Friday.
Let the Airing of the Grievances and Feats of Strength commence, for the season’s first Festivus miracle is upon us: The new jobs report is out, and it is actually something to celebrate.
What are we running up the Festivus pole in celebration this year? According to the BLS, reported nonfarm payrolls grew 271,000 in October, a big pick-up from August and September’s figures and sufficient to drop the U.S. unemployment rate to 5.0 percent, a 7.5 year low.
However, perhaps more important than the headline figures is the type of work being done and the wages being paid. The number of part-time workers who would rather have full-time jobs has fallen by more than 1 million to 5.7 million in the past 12 months, also a 7.5 year low. Wages also saw a boost. Average hourly earnings were up 9 cents, representing a monthly gain of 0.6 percent and an annualized increase of 2.5 percent.
“The employment report had everything you could have asked for. It more than offsets the weakness in the prior two months and positions the Fed to hike rates in December,” Michelle Meyer, deputy U.S. chief economist at Bank of America Merrill Lynch in New York, told Reuters.
And with that level of enthusiasm abounding, you may wonder why we aren’t declaring this an early Christmas or Hanukkah miracle? Well, to be frank, the jobs report wasn’t that good. We can still find grievances.
While a 2.5 percent gain in wages in a big improvement after years of wages that essentially saw no growth, it is still well below the 3.5 percent that the Federal Reserve considers healthy. And while the decline in unemployment to 5 percent is heartening, it bears mentioning that the BLS does not include those who are no longer looking for work or those who are working part time against their will. When those figures are counted in, the unemployment/underemployment rate is generally estimated at around 9.8 percent. On the upside that is the first time that has been lower than 10 percent since May 2008, but it is still well above pre-financial crisis levels.
Labor force participation remains low at 62.4 percent.
However, while it is clear there are feats of strength left for the job market to complete on the road to actual health, the last report before the holiday retail madness goes into full swing should serve as an encouraging sign for the nation’s retailers. The NRF predicts a moderately strong increase in holiday retail spending this season, predicated largely upon consumer spending stimulated by an improving jobs and wages scenario. Tepid reports in August and September were leading some to wonder, as the holiday sales start spreading across the land, if those predictions were going to be borne out.
It look likes the economy is actually starting to show some of that predicted strength, though, again, not so robustly that there is not room for complaint.
But then, that’s why it’s a Festivus miracle.
As First Data learned during its IPO earlier this year, life is not easy for a payments processor that fails to deliver on IPO expectations. It doesn’t matter if a firm raises $2.6 billion and ends the day on a $14 billion valuation, giving the NYSE its largest floatation of the year so far. What matters most when the headlines are written is what was expected, which in First Data’s case was a figure that unfortunately got as high as $40 billion.
Which may explain the conservative $4.2 billion valuation Square is pursuing for its forthcoming IPO.
Multiple billions of dollars is certainly no small sum in most circumstances, but it’s a little different in the unique case of Square, whose most recent funding round was kicking around with figures circling in the $6 billion range. And $4.2 billion does not seem to be a floor they are pursuing; the firm’s SEC filing explicitly note the company’s stated goal to snag a valuation as much as $4.2 billion.
In terms of the offering itself, Square is looking to bring its shares public at a range of $11 to $13, with the ultimate “set aside” of 4 million shares for the company, indicating that it will raise more than $400 million, noted Bloomberg. The $4 billion tally comes through the total offering of 323 million shares that will be outstanding after the IPO.
Interestingly, it seems that Square is also looking to raise funds to boost working capital despite facing continued net losses. According to wide reports, Square’s revenue base saw a 2014 top line at $850 million, up from $552 million in 2013. The revenue run rate for this year looks to top $1 billion – and yet Square has warned that its growth rate may decline, due in part to the looming end of the Starbucks agreement that has made up a hefty mid-teens percentage of Square’s revenues.
Plus, Starbucks could end up being even more expensive for Square since the S1 indicates that Square is also selling off 2 million shares of stock in their firm held by Starbucks for about $16.80. If Starbucks cannot get that above the IPO-rate price, Square has to pay up the difference.
Ouch.
But the good news may end up being that investors go into the IPO primed to feel like they’re picking up Square for a bargain price, which would in turn boost share price when the stocks are widely available.
But while that may be Square’s best shot for a victory, it is at best a long shot as well.
So, what’s the moral of the story? Deliver, more or less, what is expected (like Visa) and the market will get around to a reward. Do somewhat better (or at least appear to) and enjoy a shower of headlines. Miss the mark entirely, make the market nervous and start muttering about “spectacular unicorn combustion” as something we might just be reading about in an upcoming Data Dive.
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